Business

Saving for retirement and college

If you have young children, you may want them to attend college someday — and you may want to help them pay for it. At the same time, you also need to save for a comfortable retirement lifestyle. Are the two goals compatible?

There’s no easy answer to this question. But one thing seems clear: For many parents, saving and investing for their children’s future is every bit as important — and maybe more so — than saving and investing for their own. In fact, two-thirds of parents said they would postpone retirement if necessary to help pay for their children’s college education, according to a survey by Alliance Bernstein Investments Inc.

Parents have good reason to believe that investing in a college education will pay off for their children. Over the course of their lifetimes, college graduates will earn, on average, about $1 million more than high school graduates, according to the U.S. Census Bureau.

So, since a college education appears to be quite valuable, shouldn’t you do everything you can to help pay for it?

Ultimately, you’ll have to weigh your potential college contributions against your need to save for your own retirement. On one hand, you’d like to help your children as much as possible; as a parent, you don’t want your children saddled with enormous debts when they leave college. But on the other hand, that type of reluctance may be based more on emotion than on a sound financial strategy. After all, college graduates seem to find a way to eventually pay off their loans. Furthermore, your children may be able to find grants, scholarships and work-study opportunities. Many students can earn a decent amount of money at summer jobs, too.

Nonetheless, you still may feel obligated to pay something toward your children’s college education. But if you’re going to help pay for college, be smart about it. For example, think twice before borrowing from your 401(k). Such a move will slow the growth potential of your retirement funds and it could prove costly in other ways, too. For one thing, if you leave your job, voluntarily or involuntarily, you’ll need to repay your 401(k) loan completely, usually within 60 days. If you can’t, the balance will be considered a taxable distribution‚ and you may even have to pay a 10 percent penalty on it.

Instead of tapping into your 401(k), IRA or other accounts you’ve designated for retirement, look for other ways to help build your children’s college funds. You might decide to open a Section 529 plan, which offers tax-free earnings potential, provided the money is used to pay for higher education costs.

You can put whatever you can afford into a Section 529 plan, along with gifts from grandparents or other relatives. Contributions are tax-deductible in certain states for residents who participate in their own state’s plan. Please note that a 529 College Savings Plan could reduce a beneficiary’s ability to qualify for financial aid. You might also want to consider a Coverdell Education Savings Account, which offers another tax-advantaged way to save for college.

As you already know, much of your life involves balancing acts of one type or another, so you should be able to handle one more‚ college for your kids against a comfortable retirement for you. By making the right moves, though, you may be able to reach an “equilibrium” that works for everyone.

Doug Legg is a financial advisor with Edward Jones in Federal Way: (253) 838-3332 or doug.legg@edwardjones.com

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